2.2 Term Life Insurance

Term life insurance provides pure death-benefit protection for a specified period — the term. It builds no cash value, has the lowest initial premium of any life product, and pays only if the insured dies while the policy is in force. Because it covers temporary needs (a mortgage, child-rearing years, a business loan), the exam frames term as 'maximum protection for minimum premium.'

With term, the entire premium goes toward the cost of pure insurance (the net amount at risk) plus a small expense load. There is no savings element, so when the term expires the coverage simply ends with nothing returned — unless a return-of-premium feature was purchased.

Key Characteristics

• Temporary coverage for a stated term (1, 5, 10, 20, or 30 years, or to a specified age such as 65).
• No cash value / no living benefits — it is not a savings vehicle and has no loan value or nonforfeiture options.
• Lowest premium initially, but cost rises sharply at older ages on renewal because mortality risk increases.
• Pays the face amount only if death occurs during the term.

Types of Term Insurance

A close cousin is interim term (short coverage bridging to a permanent issue) and family income / family maintenance riders, both built on decreasing or level term. Decreasing term is the engine behind classic mortgage protection policies and the credit life sold with consumer loans.

Policy Features That Protect the Insured

Renewability

A renewable term policy lets the owner renew for another term without proving insurability (no new medical exam). The premium increases at renewal based on the attained age — the insured's age at renewal — which is why ART premiums climb each year. This protects an insured who has become uninsurable due to a health change, because the insurer cannot demand new evidence.

Convertibility

A convertible term policy lets the owner exchange it for a permanent (whole life or universal) policy without evidence of insurability. Two ways to set the new permanent premium:

• Attained-age conversion: premium based on the insured's age at conversion (lower immediate cost, no lump-sum adjustment).
• Original-age conversion: premium based on the age when the term policy was first issued (requires paying the back-premium difference plus interest, but locks a lower permanent rate for life).

Many level-term policies allow conversion only during a stated conversion period (often the first several years or up to a specified age). After that window closes, the conversion privilege expires.

Trap: Renewability protects continued term coverage; convertibility allows a switch to permanent coverage. The exam often swaps these definitions or asks which one requires no medical exam — the answer is both, but for different end results.

Worked Premium Comparison

Consider a healthy 35-year-old male, $500,000 face:

Term is roughly one-tenth the cost of permanent coverage for the same face amount at the same age — the classic 'buy term and invest the difference' argument. The trade-off: term has no cash value and may become unaffordable or expire when the insured is older and still needs coverage. This is the central planning tension the exam tests between temporary and permanent products.

Return of Premium (ROP) Term

A return-of-premium rider/policy refunds the total premiums paid if the insured survives the term. Premiums are higher than standard level term, and the refund is income-tax-free because it is a return of the insured's own money, not a taxable gain. If the insured dies during the term, the policy pays the face amount like ordinary level term. ROP closes the 'lose all premiums' objection to term but costs more, so it is only worthwhile when the insured is highly likely to survive the period.

When Term Fits

Term is the right recommendation when the need is large but temporary and the budget is limited — young families with a mortgage and small children, key-person coverage tied to a loan, or buy-sell funding for a fixed payout period. Convertibility lets the client upgrade to permanent coverage later if a long-term need emerges.

Re-Entry Term

Some level-term contracts offer a re-entry (or revolving renewable) provision. At the end of the period, the insured may submit new evidence of insurability to qualify for a lower 'select' premium based on current good health; without re-qualifying, the premium jumps to the higher 'ultimate' guaranteed rate. Re-entry rewards healthy insureds with lower cost but penalizes those who cannot pass underwriting — the opposite of guaranteed renewability, which never requires evidence.

Premium Modes and the Cost of Frequency

Like all policies, term premiums can be paid annual, semiannual, quarterly, or monthly. The annual mode is cheapest because the insurer holds the money longer and incurs fewer billing expenses; more frequent modes add a fractional-premium load. A monthly payer therefore pays slightly more per year than an annual payer for identical coverage — a small but commonly tested point.

Trap: Term has no nonforfeiture values, no policy loans, and no cash surrender value. If an exam question lists 'cash surrender option' as a feature of a term policy, it is incorrect.